Early Stage Investing Take 2: CBInsights Updates Their Funnel and We Update Our Model

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Earlier this year, I wrote Angel Investing at Today's Market Rates is a Losing Proposition where I presented a model for angel investing and showed that essentially index investing into the early stage set of startups at a market rate of about $6M pre-money put you at a loss after 5-6 years of about 22.6%. It was a sobering result which showed that valuation matters at early stage if you want some chance at making money. In contrast, the break even starting valuation was $4.08M.

Then, CBInsights recently put up a new funnel in their new post The Venture Capital Funnel: Your Chances Of Raising Follow-Ons, Exiting, And Becoming A Unicorn.

For some reason, CBInsights took down their old post and put the new post at the old URL. As a comparison, here is the old funnel based on 2009 data:

Here is the recent funnel:

What are the differences? Note that the recent funnel is built on both 2009 and 2010 data, but more importantly, it is now combined with both seed and seed VC data (we asked the CBInsights staff) which increases the number of startups by 6.4x!

In my previous post, I noted that one caveat about the CBInsights 2009 funnel data:

The CBinsights database is made mostly up of companies who have done equity rounds. Given that the world of seed seems dominated by convertible note financings which don't show up in the CBinsights database, what does this dataset mean? Equity financings typically include a seed fund or something similar like an angel group. So you can be sure that most of the companies all have an entity behind them to help them with their progress. They have an advantage with this help over those who do party rounds of only angels. Still, despite the help of these funds, the funnel ends up negative for those who invest in these companies at seed.

It took about 25 startups that had a seed VC involved, to yield one potential unicorn out the other end. However, when you add in data that does not include a fund, you now need 115 startups to yield one potential unicorn out the other end!

For those of you angels who think you got something special, this data shows that you are approximately 4.6x less likely to create a startup that makes it to potential unicorn status UNLESS you can get a seed VC involved at some point.

OK maybe you don't care about creating unicorns. How about just making money? We updated the previous model to include these current funnel numbers. You can download it here.

As you might guess, you are farther from breakeven than before. The model says you will be 35.7% short at the end of 5-6 years of investing. Using the Goal Seek function in Excel, we solved for breakeven in the starting average valuation of your investments. Now it's even lower at $2.72M pre-money.

Once again we say that this is just a model: one reflection of reality. It also comes with a bunch of assumptions and caveats that still apply (see the second half of my previous post). This model may or may not apply to you, but smartly you should use the insights in your strategies for your own startup investing - and early stage investing just got a little bit more scary.

Many thanks to our principal Tom for updating the model.

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This page contains a single entry by DShen published on December 11, 2015 2:24 PM.

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